Consumer Says: Tariff Effects Remain a Waiting Game for Consumers

Temperature check on the U.S. economy

In each edition of Consumer Says, our economists give an updated rating for current economic conditions using temperature as a metaphorical metric. Our “perfect temperature”--signifying an economy that is strong but not overheating–is 70 degrees. 

🌡️ Current temperature: 65 ℉

Since our last newsletter, we have kept the temperature stable for the U.S. economy. While the U.S. involvement in the Iran-Israel conflict has so far remained limited, there have not been data releases that show improvement in the U.S. economy. If anything, on the top-line, the figures for unemployment, inflation, consumer spending and consumer sentiment are “fine”, but the underlying weakness in these indicators continues to show up.

Consumer says:

🛒 First signs of cooling spending? Our previous newsletter and recent analysis noted that consumer spending may be beginning to cool. The latest personal consumption expenditures release by the BEA showed that the slowdown was driven by goods spending (both for durable and nondurable goods). Not every category of goods registered a month-over-month decline. On the goods side, clothing, apparel, other durable goods, recreational goods & vehicles rose. The pull-down in May spending was led by motor vehicles and parts, which had seen a dramatic increase in March due to consumers pulling forward purchases ahead of tariffs. 

• 📣Consumer Says: Similar to the BEA release, Morning Consult’s U.S. consumer spending data, which is comparable to PCE in that it covers a broader array of goods and services categories than just retail, showed a modest decline of 0.5% in May (after adjusting for inflation and seasonality). Although category-level spending changes do not align each month due to methodology differences between the two surveys, there was alignment for the clothing and apparel categories. As we have repeatedly stressed, spending  (and positive momentum) is again driven by the high-income consumer.

😵‍💫How are the vibes? The University of Michigan consumer sentiment survey showed an increase in June after dropping to alarming levels in May. The preliminary release for July will be published on the 13th. The data collection period runs from June 24 to July 14th. While the full data collection period has not been completed at the time of writing this newsletter, Morning Consult’s daily sentiment data allows us to preview, looking at data through July 7th.

• 📣Consumer Says: Morning Consult’s daily Index of Consumer Sentiment shows the world of haves and have-nots in the most recent update. For lower-income households, consumer sentiment never truly recovered after the drop at the beginning of the year. The strength is undoubtedly there for higher-income households, and sentiment has reverted to the lows of 2025 for those in the middle. What does it mean for spending? Sentiment alone does not move the direction or magnitude of consumer sentiment. To grasp the whole picture, we should also consider employment and income.

💼Still a stable labor market, but one with noticeable cracks: The Bureau of Labor Statistics (BLS) released its latest unemployment rate on July 3rd. On the top-line, the data seemed good; the unemployment rate fell to 4.1%. But the good news essentially ends there. In the latest release, the job gains were primarily concentrated in government, while private sector hiring figures were weaker than last month. Jobs in manufacturing and trucking fell, perhaps due to tariff uncertainty. The labor force shrank to 170.38k, and labor force participation declined. The unemployment rate stayed low because both the demand and supply of labor fell.

• 📣Consumer Says: Morning Consult’s U.S. Unemployment index also suggests modest joblessness. Similar to the BLS measure, there have been minimal movements at the top-line when we compare the June figures to the beginning of the year. However, the demographic breakouts show that not every cohort has the same experiences. The lower turnover and demand for labor have created an even more difficult period for those with lower levels of education and experience. But to bring it full circle ahead of the next update to our U.S. Consumer Spending tracker, we again look at the Consumer Health Index, which combines current personal financial conditions and the unemployment index. Consumer financial health varies widely depending on income demographics. Will the slight uptick in CHI for 100k+ households be enough to compensate for the deteriorating conditions for middle-income and lower-income households? It seems unlikely.